Econ Weekly (Sep. 20, 2021)
Featured Place: Boise, Idaho
Inside this Issue:
Inflation Deceleration: No Fooling, Prices Cooling
No Lies, Few Supplies: Supply Chain Strain Still Causing Pain
Without Affordability, No Mobility: Why Americans Aren’t Moving
Atoms Versus Bits: A Lack of Productivity Gains in Things Not Digital
Qualcomm: On 5G, Semicons and ARM’s independence
Gains in Gotham: The Latest Real Estate Trends in New York City
A Global Dollar Shortage? More Movement in Money Markets
Silicon Suspicions: FTC Again Reveals Discontent with Big Tech Takeovers
Out of this World: The Origins of SpaceX
Louisiana Look Back: Economic Conditions in the Time of Huey Long
And This Week’s Featured Place: Boise, the Idaho Dynamo
Quote of the Week
“In supply chain management they call it the bullwhip effect, where these waves of impacts just flow through the industry. And automotive is a perfect example of that, where all it takes is a semiconductor chip not being available. All it takes is tightness in the area of steel or rubber or aluminum. It can literally bring an industry down.”
– Mike Wall, executive director of automotive analysis for IHS Markit
You can’t get a car because there aren’t enough semiconductors. You can’t take a good job in the booming city because there’s no affordable place to live. You’re waiting forever for that new sofa you bought. And waiting forever for your food to arrive—the restaurant is short-staffed. That knee replacement surgery you need? Gotta wait. Not enough nurses. Who’s gonna watch the kids while you’re at work? Can’t find affordable daycare. Can’t find anyone to take care of grandpa.
Welcome to the Shortage Economy, where quite simply, there’s not enough stuff. This scarcity, in turn, is causing prices to rise, especially for companies. But less so for consumers, as the latest inflation figures show. Reassuringly, many of the economy’s bottlenecks are tied to temporary Covid-related disruptions, the latest being factory shutdowns in Asia. That said, the reason for worker shortages remains mysterious, with low labor participation rates a feature of the American economy for two decades now. Likewise, an increasingly unstable climate, another cause for current production and inventory shortages, appears to be more than just a momentary reality.
Make no mistake: The current shortages aren’t that bad in a historical context. Consider the gas lines of the 1970s? The ruined factories of Europe after World War II? The food shortages plaguing all-too-large parts of humanity today? Besides, the not-enough-supply economy of 2021 feels a whole lot better than the not-enough-demand economy that characterized the aftermath of the 2008/09 financial crisis.
Currently, demand throughout the economy remains strong, if softening somewhat from earlier in the year. Covid remains an obstacle to maintaining brisk levels of growth. But most of Corporate America, including the vital financial sector, remains healthy and profitable. Jobs are plentiful for those who can and want to take them. Inflation, as mentioned, seems a modest threat at worst. Household balance sheets are solid, as are the finances of most state and local governments (SLGs are very large and generally well-paying employers). The federal government’s finances don’t look so good, but there’s a big debate about how much that matters. To be sure, if the federal government hadn’t spent so much money to bolster incomes and balance sheets, the rest of the economy might be in much worse shape.
Longer term, better infrastructure should help ensure more resilient supply. To many in Washington, that means better roads, bridges, power grids and so on. To others, particularly those focused on solving the labor participation riddle, the answer is a larger federal role for ensuring access to quality affordable health care, childcare and eldercare. The supply side of the economy would also benefit, President Biden believes, from a more vigorous application of competition laws. As for housing supply, that’s a tougher nut to crack, constrained by a constellation of local opposition to new building. A housing shortage, naturally, means more wealth for those who currently own houses, as the past year’s super-spike in prices makes clear. So the resistance to new construction isn’t surprising. A separate obstacle when it comes to producing new homes: A dearth of innovation in home construction. It’s not like with most consumer goods including computers, which have seen sustained productivity gains and price declines for decades. It’s a problem in higher education too, and an extreme problem in health care.
America’s Three H dilemma—housing, health care and higher ed costs—won’t get resolved any time soon. Nor, it seems, will the semiconductor shortage, wreaking havoc on the vital auto sector most troublingly. Earlier this summer, it looked as if the shortage would be easing by now. Instead, the new consensus is sometime during the second half of 2022. Auto sales, sure enough, declined sharply in August—there’s plenty of demand for new cars, just not enough supply.
Sales of other retail items, along with restaurant sales, did however increase by nearly 2% in August, according to the latest Census data. Even including autos and auto parts, total retail sales rose 0.7%, allaying fears after July’s roughly 2% decline. Sales remain strong for categories like home furnishings and groceries. Restaurant and bar sales alone were flat, with declines expected this month as Covid concerns worsen.
You can say this about the economy in 2021: If you’re making things, moving things or selling things, you’re probably earning strong profit margins. It’s true for even supply-chain-challenged manufacturers of cars (if not airplanes). It’s certainly true of logistics companies like FedEx and UPS. And it’s true of big retailers like Walmart and Amazon. Amazon’s Big Tech colleagues are certainly doing well this year too, perhaps too well—as you’ll read below, antitrust momentum continues to build, with support from both Democrats and Republicans.
Democrats and Republicans on Capitol Hill continue to wrangle over the debt ceiling, amid the terrifying prospect of Uncle Sam failing to make good on its Treasury debt. The Treasury market—sitting at the center of the global economy—certainly doesn’t need the extra drama. It had enough of when Covid first struck in early 2020, prompting a brief selloff that called a foundational premise of the financial system into doubt: Were Treasuries really a risk-free form of money and a perfect substitute for cash?
The Fed might have more to say about all this when it holds its next policy meeting this week. The big question is when exactly it will start to decrease its asset purchases, among them Treasuries—the Fed’s voracious buying is one reason why interest rates on Treasuries remain so low. Will they now rise as the Fed tapers? Or are other countervailing forces in play, like longterm demographic trends? Keep in mind: If Treasury rates rise, so too will mortgage rates and other borrowing costs for U.S. households and businesses. Then why even bother tapering? Because dangerous inflation remains a threat when borrowing rates are so low, even if it hasn’t led to much new money creation recently.
There will be lots to talk about in Q3 earnings season, now just weeks away. Apple debuted its new iPhone. Kansas City Southern, North America’s seventh largest railroad, elected to merger with Canadian Pacific, not Canadian National. Amazon plans to hire another 125,000 people. General Dynamics (if not France) is happy about a new U.S. deal to sell nuclear subs to Australia. Facebook was again the subject of unflattering reports about its behavior. American Airlines is investing in a Brazilian carrier once backed by Delta. Cisco presented its latest business plan to investors. Goldman Sachs is buying a fintech rival. Corporate America is watching to see if China is on the verge of a Lehman moment. The buy-now-pay-later concept is hot. So is the crypto space and debates about how to regulate it. The second quarter isn’t ending quietly.
The Latest on Inflation:
The closely watched Consumer Price Index (CPI) showed a comforting slowdown in August, rising just 0.3% from July’s reading. That’s after a rise of 0.5% a month earlier, and 0.9% the month before that. It was, in fact, the slowest monthly rise in prices since January. Exclude food and energy, and consumer prices barely rose at all—just 0.1%. To be clear, even as the month-to-month pace of inflation slows, prices remain 5% higher than they were time last year. And 5% is high—the Fed’s target for annual inflation is just 2%, and the rate just before the pandemic was sub-2%. But throughout the year, Fed chief Jay Powell insisted that the spike would prove just temporary, so no need to overact by tightening the money supply. A temporary bout of elevated inflation, the Fed now says, is no cause for alarm.
The bottom line: Consumer prices are still rising, pressured by supply shortages that don’t seem to be getting better. But there’s downward price pressure now too, as a resurgence in Covid dampens demand. In addition, a summer of high inflation left many Americans with diminished purchasing power, even as their wages increased. Indeed, in a race between rising prices and rising wages, the price rises have been winning. Of course, fiscal support has waned as well, with Americans no longer getting stimulus checks. Bonus unemployment compensation, still available during August, is disappearing this month, perhaps putting further downward pressure on demand and thus prices.
Just to put a number on those wage gains: According to the Atlanta Fed, median wage growth for June through August was 3.9%, well below the 5% rise in prices. And don’t forget: The labor market looked much worse than expected in August, with job creation slowing significantly.
Taking a close look at the August CPI data, prices for certain foods like beef, chicken, eggs and fresh vegetables are still rising sharply. So are energy prices, led by motor fuel and natural gas. Ditto for some home goods like televisions and bedroom furniture. Also maintaining high upward momentum are prices for new vehicles. Not used vehicles though: They’re getting a bit cheaper now after huge spikes earlier in the year. Recall that used vehicle inflation was a big driver of overall inflation this summer. So too was a sharp rebound in prices for travel-related transportation. Now, rental cars and airline fares are trending the other way, falling significantly amid the renewed unease about Covid.
Importantly for the economy, price inflation for housing—the item carrying the most weight in the CPI—remains subdued, rising rental rates this month notwithstanding. (Yes, buying prices are up but that’s considered an investment rather than a consumer purchase; costs are stable for those already owning a home). Health care costs, setting aside the alarming longterm inflationary trends, have been stable throughout 2021. Education prices are currently subdued as well.
The separate producer price index, we should note, was up a scorching 8.3% y/y in August. Exclude services, meaning just goods, and prices were up close to 13%. Clearly, not all of this additional cost is getting passed on to consumers. And evidently, most companies are somehow still finding a way to be profitable, perhaps through tactics like early retirement packages for higher-earning senior employees.
In his Jackson Hole speech last month, Powell explained why he’s not terribly worried about inflation right now. For one, the inflation seen this spring and summer was mostly driven by a narrow group of items like energy, used cars and airfares. Many such items, furthermore, showed large price gains only after crashing early in the pandemic. Durable goods more generally (cars, electronics and home appliances, for example) have a 25-year record of steady deflation, with prices declining 2% a year on average. Supply chain issues are surely making durable goods more costly in 2021. But, says Powell, “it seems unlikely that durables inflation will continue to contribute importantly over time to overall inflation.” There’s also a 25-year record of structural forces like technology, globalization and aging demographics pushing down on prices.
And so, Powell and the Fed now have August data on the two areas they’re charged with optimizing: Jobs and Prices. The job trends are discomforting (which seems to merit a dovish stance with respect to winding down stimulus measures). The price trends are reassuring (which also removes pressure to quickly start a winddown). Nevertheless, a winddown is likely to begin before year end, meaning a pullback in monthly asset purchases. That’s the “tapering” everyone talks about, and which Powell will talk about when he addresses the public this week.
This is an abbreviated version of this week’s issue. To continue reading, visit